Economy

Instead Of Snoozing In Savings, Let's Put $5,000 To Work

If you have a savings account you probably already know this: Your money there is losing value to inflation. Yields are so low that returns are not even keeping up with the cost of living.

I've been watching some of my own savings dwindle. And that prompted me to take up a challenge: I'm taking $5,000 from personal savings and putting it to work. I'm not a financial whiz, pundit or any kind of guru.

In the coming weeks, I'll be reporting on the various investments I decide to pursue. Along the way, I hope to provide some useful information about avoiding high fees in mutual funds, bulk buying at discount stores as a hedge against inflation, and staking a claim in real estate for just a few hundred dollars. We'll keep a scorecard of my investments and track how they perform over time.

But back to those paltry returns from savings. Jacob Kirkegaard of the Peterson Institute for International Economics says it's an "absolutely miserable" time to be a saver and has been ever since the financial crisis began.

It's a freakish situation last experienced during the Great Depression. "We haven't seen a sustained period where interest rates have been this negative for this long. This is a truly unprecedented situation," Kirkegaard says.

When Kirkegaard says "this negative," here's what he means: The average yield, or interest rate, on a savings account at a major bank is 0.1 percent, according to Bankrate.com. Inflation is running at 1.7 percent. Do the math there. It's a lousy deal for savers.

For more than four years, the Federal Reserve has tried to revive the economy by getting credit flowing more energetically. In pursuit of that goal, the Fed has kept interest rates at nearly zero percent.

That's why yields are so skimpy on savings accounts. "So you can say that savers and the return that savers earn on their money is kind of a collateral damage in the crisis management conducted by the Federal Reserve and other central banks," Kirkegaard says.

My wife and I have a kid in college and a mortgage, I put money into my retirement plan, and anything left over goes into family savings. And, yes, it's kind of frustrating to see that money chipped away by inflation. It's far worse for someone on a fixed income who pays for food, rent and medical expenses out of savings.

So how about that $5,000? I stopped in to see Nessa Feddis, a senior vice president at the American Bankers Association. I asked her to make the best case for the savings account. "Bank accounts are FDIC insured," she says. "That means that no matter what happens to the institution, if the bank fails, no matter what happens to the economy, the customer's money is safe, up to $250,000."

What else?

"There's a convenience to having a savings account in the same institution where the customer's checking account is," Feddis says.

Convenience and FDIC guarantees are fine. But with the Fed expected to keep record low rates for a while longer, there's not much hope that those savings will grow. So I'm setting that cash loose into the world of risk and reward. The investments could lose value. But they could also come out ahead, which is something that can't be said — for now — for the money I have parked in savings.

For years, one of the safest things to do with money was to put it in a savings account or a CD. Today, not so much. Yields are so low that savings stashed away in these accounts lose value to inflation. NPR's Uri Berliner has been watching some of his own savings dwindle. In a series we're calling Dollar For Dollar, he tries to put some of that money to work.

URI BERLINER, BYLINE: I decided to take $5,000 from savings to explore various types of investments. Believe me, there are plenty of them out there.

UNIDENTIFIED MAN #2: And in this video I want to talk to you about your journey as a real estate investor.

UNIDENTIFIED WOMAN #1: Silver actually makes the better investment.

UNIDENTIFIED MAN #3: Investors worldwide are creating a global stamped and investing their money in Brazil.

UNIDENTIFIED WOMAN #2: I never thought I'd be spending this much time in parking garages. But to invest in that area you have to.

BERLINER: These kinds of pitches may not be your idea of fun. But to be a saver?

JACOB KIRKEGAARD: Oh, it's absolutely miserable.

BERLINER: That's Jacob Kirkegaard of the Peterson Institute for International Economics. Since the financial crisis, savings accounts have offered a negative yield, another way of saying your money there shrivels, losing value to inflation. Kierkegaard says this is a freakish situation, last experienced during the Great Depression.

KIRKEGAARD: We haven't seen a sustained period where interest rates have been this negative for this long. This is a truly unprecedented situation.

BERLINER: When Kirkegaard says, this negative, here's what he means. The average yield, or interest rate, on a savings account at a major bank is 0.1 percent, according to Bankrate.com. Inflation is running at 1.7 percent. Do the math there. It's a lousy deal for savers. For more than four years, the Federal Reserve has tried to revive the economy by getting credit flowing more energetically. In pursuit of that goal, the Fed has kept interest rates at nearly zero percent.

Kierkegaard says that's why yields are so skimpy on savings accounts.

KIRKEGAARD: So you can say that savers and the return that savers earn on their money is kind of a collateral damage in the crisis management conducted by the federal reserve and other central banks.

BERLINER: My wife and I have a kid in college, a mortgage, and I put money into my retirement plan. Anything left over goes into family savings. And yes, it's kind of frustrating to see that money chipped away by inflation. It's far worse for someone on a fixed income - who pays for food, rent and medical expenses out of savings.

Now, I've got $5,000 to work with here. So I stopped in to see Nessa Feddis. She's a senior vice president at the American Bankers Association. I asked her to make the best case for the savings account.

NESSA FEDDIS: Bank accounts are FDIC insured. That means that no matter what happens to the institution - if the bank fails - no matter what happens to the economy, the customer's money is safe, up to $250,000.

BERLINER: What else have you got?

FEDDIS: There's a convenience to having a savings account in the same institution where the customer's checking account is.

BERLINER: Convenience and FDIC guarantees are fine. But with the Fed expected to keep record low rates for a few a while longer, there's not much hope those savings will grow. So I'm taking some of that money out and putting it to work. In the stock market?

FEDDIS: They've got the U.S. broad market ETF. So that's also a very low expense ratio and it includes everything in the U.S. market.

BERLINER: In bulk purchases, at a discount store, as a hedge against inflation.

UNIDENTIFIED MAN #3: Cash, if you can spare it, to convert your cash into real goods whose price is rising, that's not a bad idea.

BERLINER: In what can broadly be defined as real estate.

I'm inside a five by five foot self-storage unit in Bethesda, Maryland.

(SOUNDBITE OF A DRUM ROLL)

BERLINER: Each of these investments has its own type of risk. They could lose value. But they could also come out ahead, which is something that can't be said now for the money I have parked in savings.